A US Recession Can’t Officially Happen Unless Eight People Say So

Two consecutive quarters of negative gross domestic product growth. That’s how most countries, and basically everyone on Wall Street, defines a recession. But not, would you believe, the US government. A Bloomberg report on Tuesday was smart to point out…

Jennifer
Goldman Sachs
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Two consecutive quarters of negative gross domestic product growth. That’s how most countries, and basically everyone on Wall Street, defines a recession. But not, would you believe, the US government.

A Bloomberg report on Tuesday was smart to point out that, technically, the world’s largest economy only recognizes a recession when it’s declared by an obscure cloister of eight elite economists. One former member called them “Ivory Tower eggheads.” Here’s how they work.

Punch Above Their Eight

It all starts in 1978. That’s when Martin Feldstein, then the head of the Cambridge, Massachusetts-based nonprofit the National Bureau of Economic Research, established the research organization’s eight-member Business Cycle Dating Committee.

The US deferred the judgment of what is and isn’t an assessment to this non-partisan group, currently led by Stanford economist Robert Hall. They don’t hold scheduled meetings, meet in secret when they do meet, and sometimes only communicate by email. They also believe the two-quarter GDP standard is, well, bunk. So what’s in recession?

  • Rather than negative GDP readings, the NBER committee looks for “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” That includes data on nonfarm payrolls, personal consumption spending, and industrial production — sometimes they take up to a year to declare a recession happened, well after Wall Street is over and done with it and on to celebrating or panicking over the next big thing.
  • US GDP contracted in the first quarter, and is expected to have done so again in the second quarter (data is slated for release on July 28). But what drove the group to declare a recession in 2020 was a steep decline in output and 22 million jobs losses — with the labor market as strong as it’s been in decades, it’s entirely possible the US may no technically recognize a recession, even if you’re soon likely to see flashing cable news chyrons that say otherwise.

Take it From an Expert: “The committee’s current methodology is sound,” said Anna Wong, Bloomberg Economics’ chief US economist. “Q1’s contraction is mainly due to strong imports (due to strong demand) after slowdown inventory building due to combination of supply bottlenecks and gangbuster inventory building in Q4 last year. It’s hard to interpret that as a weakness-driven contraction.”

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